Balancing Budgets and Beds

Separating Santa Cruz the city from Santa Cruz the tourist magnate is like separating sand from salt—change one, and you affect the other.

In a continuing effort to balance the city’s rebounding budget, the city council announced an either/or tax measure on July 24 that raises the transient occupancy tax (TOT) increase, either to 11 percent or 12 percent from its current 10 percent.

A TOT increased by 10 percent, to 11 percent, would yield an estimated $440,000 for the city’s general fund annually, whereas a 20 percent increase, to 12 percent, would double that to $880,000.

The amount hinges on whether the Santa Cruz County Board of Supervisors decided to increase the county’s current 9.5 percent TOT to 12 percent, an increase of more than 25 percent, at their Aug. 7 meeting. As of press time, the Board had not voted on the item.

Because the 20 percent increase works out to thousands of dollars for large group stays and conferences, the Santa Cruz Lodging Association strongly disapproves of it. However, President of the Santa Cruz Lodging Association Dilip Patel says the city’s effort towards compromise has been encouraging.

“The city approached us [in June] and said ‘we can work together,’ which is good for us because we were able to give our honest opinion,” Patel says.

While a 10 percent increase seemed more reasonable for the lodging industry, half of the hoped-for city revenue seemed paltry.

“There hasn’t been a [TOT] increase in 21 years,” Patel says. “The hoteliers were in understanding that the city needed more funding … the lodging industry, CVC and the city were able to strike a deal.”

In this compromise, the city would only increase the TOT to 11 percent, and also be obligation-free from funding the CVC.

The CVC runs on a yearly operating budget of $2 million—approximately $550,000 of which is funded by the city and county.

An additional $1 million of that budget comes from a flat-rate lodging facility assessment fee, charged nightly to lodging facility guests at a flat rate of $1 or $1.50 per bed, depending on the size of the facility.

According to the compromise, lodging facilities would add a few cents to the current $1 city and county assessment fees, and defer the total amount to the CVC, with the hope of making up for lack of city funding.

CEO and President of the CVC Maggie Ivy says that the assessment fee increase may not totally replace the city’s funding.

“We will probably see a little decrease in our budget,” Ivy says, “but that’s something we can absorb.”

For councilmember Lynn Robinson, who sits on the CVC Board of Directors, letting the hotel industry handle its own marketing outreach is common sense.

“Government is not the best entity to do [marketing],” Robinson says. “We’re not marketers. But if you want your community to be out there in publicity resources, somebody has step up and do that—and they’re doing that with their own private money.”

Robinson was the only councilmember to vote against the city’s conditional recommendation, as it still leaves room for a 20 percent increase.

“I was the one that adamantly did not go along with that,” Robinson says. “I wanted it to stay clean at 11 percent. You really have to look at how the increase is going to affect business and, following that, the city’s overall wellbeing.”

Ivy fears that a 20 percent TOT increase would drive potential conferences away—right when conference space prospects are looking up in a city where conference space availability has rarely shined.

“Hotel Paradox [on Ocean Street] will be opening soon, and they’ll have great conference space,” Ivy says, who also references an additional hotel in the pipeline. “If I’m planning a large conference or group stay, that [TOT] amount is going to be a significant factor. They could well choose a competing destination over us.”

Additionally, hotel occupancy and room rates are just starting to turn around after their dip during the recession. Santa Cruz hotels are currently experiencing a faster growth in lodging than the state’s average, according to CVC Marketing Director Christina Glynn.

The CVC is hoping to set an example for the ballot measure, the official language for which is due from the city on Aug. 10, as a “successful public/private partnership,” says Ivy. “The collaboration between the residents, the city council, and the lodging industry has really paid off.”